Financial Crisis Essay Example Pdf

Financial crisis was defined by many numerous aspects, such as the evolution, impact of the appearance and the causes. Any situation that occurs in financial crisis in which a financial institution, or an amount of financial institutions, when is in incapacity of fulfilling the statutory regulations, which a situation that is negatively affect the functionary of the entire financial system. However, Kaminsky and Reinhart (1999) defines financial crises depending on the forms they declare themselves in 3 ways crises, which are currency crises, bank crises and twin crises. In the study of currency crises, the attacks, external and internal factors, on a currency produce important reductions of the currency reserves, substantial and intense depreciations of the currency exchange rate of the combined effects of these. However, bank crises are generated by a series of micro and macro economic factors, and the forms they take vary from manifest bankruptcy, acquisition merger or overtaking by the public sector by nationalizing a bank, a group of banks or the entire banking system. Lastly the twin crises apparently are a combination of currency crises along with the bank crises. Financial crises had been analyzed in a temporal approach and it makes the distinction between first, second and third generation crises. The first generation currency crisis models were designed to explain the problems specific to the '80s and they take on the classic form of the balance of payment crisis and the budgetary deficit financed through internal loan are considered to be generated from the inside. Moreover, the crises are more specific to small economies with fixed exchange rates and that have liberalized the capital account. For those reasons, it is being sensitive to speculative attacks that could easily degenerate into currency crises. The second generation of financial crises stems from the speculative attacks on the currencies in the European Monetary System in the years 1992 until 1993 and from the Mexican crisis in the years 1994 until 1995. The possibility of occurrence of the financial crises even in a stability economic environment was illustrated. These crises are being considered as self-generating. There are three major participants that having in the edited model presented in this category. Which are the governments that are the position to maintain the exchange rate of currency or to change the exchange rate system depending on the compared benefits of these actions and two speculators in the respective currency, those who haven't got the necessary resources to exhaust the government reserves though. The third generation of financial crises are much more complex than the other two cases, being related to the issues that generated by the balance sheet exposures and presenting three options, which are the impact of the moral hazard on the crediting process, the reciprocal impact of the currency and also the bank crisis, the implications of the currency depreciation on the balance of payments. However, the recent financial crises are mostly crises in the latter generation, which mean inside the financial sector and are related to structural dynamics as the financial innovation.

Asian Crisis of 1997

A good example provided by the Asian crisis of 1997 until 1998, the "Dragons" (Taiwan, Hong Kong, Singapore and South Korea) and the "Tigers" (Indonesia, Malaysia, Philippines and Thailand) were the models of successful economic development. Their economic grew at high rates from the early 1950's until the crisis in 1997. In 1997 the Thai Baht drop under sustained pressure and the government stopped defending it on July 2. The value of the currency immediately dropped 14 percent in the onshore market and 19 percent in the offshore market (Frank, 2003, chapter 10). And the beginning of the Asian financial crises has been marked from that time. The following currencies to drop under pressure were the Philippine Peso and the Malaysian Ringgit. The Philippine central bank had tried to defend the Peso by increasing interest rates. In spite of the government's action, it lost around $1.5 billion in foreign reserves. The government let the Peso float on July 11, it promptly dropped 11.5 percent. The Malaysian central bank stopped defending the Ringgit on July 11. On the other hand, Indonesian central bank stopped defending the Rupee on August 14. Not only the countries known as the Tigers affected by the spreading crisis, but also the countries known as the Dragons were involved in the crisis. At the beginning of the August, Singapore decided to let their currency depreciate and by the end of the September the Singapore dollar had dropped 8 percent. Taiwan decided not to defend their currency and was not much affected. Hong Kong had a currency board that pegged the exchange rate to US dollar. Hong Kong dollar came under attack, but the currency board was able to maintain peg. Initially, South Korea had won appreciated against other South East Asian currencies. However, in November the won also lost 25 percent of its value. When the crises came over ended, the dollar had appreciated against the Malaysian, Philippine, Thailand, Indonesia and South Korean currencies by 52, 52, 78, 107 and 151 percent respectively. Although the turbulence in the currency markets subsided by the end of 1997, the real effects of the crisis still can be felt throughout the region. Many banks and industrial and also commercial firms went bankrupt and output fell sharply. But overall, the crisis was extremely painful for the countries that involved. Besides the Asian crisis 1997, there are many other examples of crises. Which are not confined to emerging markets but occur in developed economies as well.

Global Financial Crisis

Allen, F., Gale, D. (2007) - An introduction to financial crises, https://fic.wharton.upenn.edu/fic/papers/07/p0720.html Kaminsky, G., Reinhart, C. (1999) - The Twin Crises: The Causes of Banking and Balance-of-Payments Problems, American Economic Review, 1999, (89), 473-500

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